Regulator Wants Monitors in Deutsche Bank, Barclays U.S. Offices as Part of FX Probe

Jenny Strasburg broke the news that New York financial regulators had notified Deutsche Bank and Barclays PLC they wanted to install monitors in their firms as part of an investigation into the possible manipulation of the foreign-exchange market. Based on preliminary findings, regulators have selected these two firms for extra scrutiny because the records collected so far from more than a dozen banks under its supervision point to the greatest potential problems at those two banks, according to sources.

The story as it appeared on Dow Jones:
July 29, 2014, 1:07 PM EDT: N.Y. Regulator Seeks to Place Monitors in Deutsche Bank, Barclays U.S. Offices — Sources

New York’s banking regulator is pushing to install government monitors inside the U.S. offices of Deutsche Bank AG and Barclays PLC as part of an intensifying investigation into possible manipulation in the foreign-exchange market, according to people familiar with the probe.

The state’s Department of Financial Services notified lawyers for the two European banks earlier this month that it wanted to install a monitor inside each firm, based on preliminary findings in the agency’s six-month currencies-market probe, these people said. Negotiations are continuing over the details of the monitors’ appointments, but New York investigators expect to reach an agreement soon.

The regulatory agency has selected Deutsche Bank and Barclays for extra scrutiny partly because the records it has collected so far from more than a dozen banks under its supervision point to the greatest potential problems at those two banks, the people said. Plus, Deutsche Bank and Barclays are among the dominant players in the vast foreign-exchange market, so investigators hope a close-up view into their businesses will help them observe other players and trading patterns, the people said.

A Barclays spokesman declined to comment; the U.K. bank previously has said it is cooperating with authorities. A Deutsche Bank spokesman said it is cooperating with investigators “and will take disciplinary action with regards to individuals if merited.”

The New York regulator’s concerns about Deutsche Bank and Barclays are becoming the latest U.S. headaches for both banks. Barclays in 2012 settled U.S. interest-rate-rigging allegations, while an investigation into Deutsche Bank’s activities is ongoing. Both banks have said they are cooperating with regulators looking into their so-called “dark pools, ” or private stock-trading venues, including relationships with high-frequency trading firms. Barclays has settled charges that it violated U.S. sanctions, while Deutsche Bank still faces an investigation in that area.

And The Wall Street Journal reported last week that the Federal Reserve Bank of New York in late 2013 lashed out at Deutsche Bank over a litany of serious financial-reporting problems the regulator said have gone uncorrected for years. A spokesman for the bank said it is “working diligently” to strengthen its technology systems and controls, spending some $1.35 billion globally and dedicating some 1,300 people to the task.

Having regulators stationed inside the offices of U.S. banks is nothing new; some banks have entire floors of their headquarters assigned to federal examiners. But the push to place monitors inside banks during a continuing investigation is the latest move by Benjamin Lawsky, whose office supervises most U.S.-based branches of foreign banks, to chart his own course in an area of intense scrutiny by other regulators and federal prosecutors in the U.S., U.K. and elsewhere in Europe.

Mr. Lawsky placed a monitor inside French bank BNP Paribas SA’s New York branch to review compliance with anti-money-laundering laws and foreign sanctions, while an investigation was ongoing. BNP ultimately agreed to pay a record $9 billion penalty and plead guilty to violating U.S. sanctions, in a settlement with the New York financial-services regulator, Justice Department and Manhattan district attorney’s office.

Deutsche Bank and Barclays are among more than 10 banks that have fired or suspended dozens of senior executives, traders and others staff in connection with civil and criminal foreign-exchange probes in the U.S., U.K. and elsewhere.

Mr. Lawsky’s office initially requested information in January from 19 banks operating in New York, according to the people familiar with the probe. Of those, more than a dozen banks remain under investigation, the people said.

The banks collectively have turned over to Mr. Lawsky’s office millions of pages of documents, including emails, chat-room transcripts and trading and financial records, the people said, and New York investigators have interviewed traders, supervisors and clients.

Where Barclays and Deutsche Bank are concerned, New York investigators have focused on documents involving trading in New York, London, Africa, Latin America and Australia, according to the people familiar with the probe.

Lawyers representing Deutsche Bank in the talks with Mr. Lawsky’s office include Robert Khuzami, who was the U.S. Securities and Exchange Commission’s enforcement chief from 2009 to 2013, these people said. Mr. Khuzami’s role representing Deutsche Bank is notable because, before joining the SEC, he was Deutsche Bank’s general counsel for the Americas and oversaw the bank’s handling of regulatory investigations globally.

Mr. Khuzami, now a partner with law firm Kirkland & Ellis LLP, didn’t respond to requests for comment.

The New York regulator envisions wide-ranging investigative roles for its monitors inside Deutsche Bank and Barclays, according to the people close to the probe. The monitors’ powers will include interviewing bank employees, clients and business partners, observing trading practices and compliance, and reviewing more records beyond what the banks already have supplied.

Mr. Lawsky’s office is completing the hiring of the two monitors. Barclays and Deutsche Bank are expected to bear the costs of the monitors, including their travel to London and elsewhere as needed, the people say.

Mr. Lawsky’s office hasn’t ruled out the possibility of seeking to place monitors in other banks it supervises depending on how its investigation proceeds.

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